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2009 Fall Members’ Meeting Summary

The Fall Members’ Meeting of the Zell/Lurie Real Estate Center began with dinner and the Max Farash Real Estate Roundtable for Research Sponsors, Executive Committee members and faculty on Monday, October 19 at The Inn at Penn. The speaker was Peter Cappelli, George W. Taylor Professor of Management, Professor of Education, and Director of the Center for Human Resources at The Wharton School, who spoke on “The Workforce of the Future.”

On Tuesday morning, October 20, Michael Fascitelli, President and CEO of Vornado Realty Trust and Chairman of the Advisory Board of the Zell/Lurie Real Estate Center, welcomed more than 400 members, students and faculty to the day’s program at The Inn at Penn. He introduced Joseph Gyourko and Asuka Nakahara, the Center’s Director and Associate Director, respectively.

“In these challenging times, we are so grateful for the support of our members… to help us deliver the program,” said Gyourko. “I can’t think of a more important time to keep providing forums for industry to meet and discuss issues of interest.” The Wharton program continues to provide research in real estate debt and equity markets, and important information through The Wharton Real Estate Review and Working Papers. Demand for courses in the major remains high; in fact, the program is currently searching for an additional faculty member. Peter Linneman, the Sussman Professor of Real Estate & Finance at Wharton, asked for a moment of silence to remember Center supporter and research sponsor Melvin Simon who passed away in September. Asuka Nakahara then encouraged members to look to Wharton students for new hires or interns, reminding them that the next real estate career fair will take place on Friday, January 22, 2010. “Remember, this is a great year to hire. Other industries are down and small firms can compete. Compensation can be flexible,” he said.

Todd Sinai, Associate Professor of Real Estate and Business & Public Policy at Wharton, opened the day’s first panel, “The Economy and the Property Markets: A look forward from Wharton’s Senior Economists.” “The change in the past year has been remarkable,” said Sinai. “Unemployment is at 9.8 percent and the GDP is down 2.7 percent—yet there is some hope with job loss rate slowing and some companies reporting higher earnings. Is this a real recovery, and what will it look like if we are in one?” Peter Linneman said, “We are already in a recovery without realizing it,” comparing today’s economic downturn to those of 1973 to 1975 and 1980 to 1982. “The consumer confidence index is low, like it was then, and there are elements of panic. It took two years for that panic to alleviate, which actually brings about stronger recoveries—stronger than any model can predict.”

Jobs will lag the true recovery by six to nine months, Linneman added. Susan Wachter, the Richard B. Worley Professor of Financial Management at Wharton and Professor of Real Estate, Finance and City and Regional Planning, agreed. She then reminded the audience, “We’re making great recoveries, but on the back of government intervention. We are out of recession. Housing has recovered in a sense, but is still 30 percent down. Interest rates are down . . . But this will be a long, slow recovery.” Since basic production turned around during the summer, Joe Gyourko thinks the recession is basically over. However, “What we’re seeing now is a one-time readjustment, not growth, which will go on for six months at most.” He added that consumption, investment, government and net exports drive growth, and predicts a “1 to 1.5 percent growth next year, which is better than last year, but still not enough to get substantial growth.” The three panelists agreed that they look at the next six months to a year with cautious optimism tinged with reality, and that people should remember for the future that leverage is risky but cycles happen. Even during times of moderation, real estate cycles happen.

In answer to an audience member’s question about regulatory overhaul of the financial system, Goolsbee said, “Most important, we need to establish sensible rules of the road so we don’t repeat what just happened. The rules can’t apply only to banks… there have to be standards and accountability across the market.” He believes that economists care most about having a level playing field across jurisdictions. “Regulation is critical, and we need to have someone overseeing it every day, requiring certain standards.”

After a break for lunch, moderator Peter Linneman opened the second panel, on “The new alphabet soup of regulation: What will this mean for you?” Linneman asked Susan Stiehm, Deputy Policy Advisor of the Markets Group of the Federal Reserve Bank of New York, if what happened with the financial markets was because we weren’t enforcing the regulations we had, or because we didn’t have the right agencies in place. “There were structural deficiencies in the market that were brought to the forefront … It was both,” she said. “There were some deficiencies but there could have been more conservative things in place. And those institutions that are not safe and sound need to be somehow brought under the umbrella of supervisory bodies.”

“Forty percent of the financial world is largely outside the regulatory umbrella,” agreed Jeffrey D. DeBoer, President and CEO of the Real Estate Roundtable. He added that he thinks the administration should look more closely at those groups outside the regulatory net. “But how far will the pendulum swing? Are we going too far in the other direction? Yes, as it naturally does after big events.” Keith F. Barket, Senior Managing Director of Angelo, Gordon & Co., reminded the audience that the rise and fall in home prices has never happened to this degree before, and there were no unflawed models to look at. “But the rating agencies got it wrong-certainly on sub-primes. Maybe it would make a difference if the paper buyers rather than issuers were hiring the rating agencies,” he added. The panel moved on to discuss the future of giant institutions Freddie Mac and Fannie Mae, TALF, securitizations, new whole loans, REITS, and ways to get new lending to go forward; how to get new liquidity.

Joe Gyourko moderated the final panel of the day, “Where Will the Capital Come From and How Will it be Used?” with panelists Terrance R. Ahern, Principal, Founder and CEO, The Townsend Group; Peter E. Baccile, Vice Chairman, JP Morgan Securities Inc.; and David Twardock, President, Prudential Mortgage Capital Company. The panel focused on the question of who is supplying capital and under what terms. The panelists also discussed the needs of the investor and the future of public and private capital markets. The current state of the debt and equity markets is mixed, according to the panelists. Baccile commented that the capital markets are wide open and Twardock cited the requirements necessary for money for new loans to be freed up. Ahern focused on the private equity market, which is seeing little commitment activity, with transactions at historic lows. Gyourko asked how things have changed in the past year and Twardock suggested that because nobody really knows what values are, few are writing checks for equity; however, there is good news today, as real estate looks like a better value relative to other things. According to Ahern, in the future, one thing is certain, that being a lender and borrower at the same time isn’t efficient, and leverage doesn’t improve the risk of adjusted returns. The panel closed on a note of agreement that the government’s actions to date have been helpful.

Mike Fascitelli closed the meeting, reminding members that the 2010 Spring Meeting will be held Tuesday and Wednesday, April 27-28, at the Rittenhouse Hotel in Philadelphia.

A downloadable audio recording of the meeting is available to our members. Please contact Ron Smith for more information.

Posted November 2009

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